Real Estate - Brock Dombrovski

Minnesota's Cannabis Industry Status Update

Current Status

● A license will be required to operate a recreational-use cannabis business.
The window closed August 12 on applications for the first round of the license lottery.

● The first license lottery is for Social Equity Applicants based on criteria set forth in legislation passed in 2024.

○ Legislation passed in 2023 had previously authorized a points system for awarding licenses, but this was subsequently seen as a lightning rod for litigation, so new legislation was passed this year in favor of a license systems emphasizing social equity. More on that criteria can be found here : Social Equity Qualifications

● The newly created Office of Cannabis Management (OCM) is now reviewing and vetting applications to confirm their qualification to be included in the lottery.

Government

● The legislation created law that provides broad structure for a recreational-use cannabis industry in Minnesota.

● The Office of Cannabis Management (OCM) is responsible for creating the rules that the industry will follow. The OCM’s goal is to have a full set of rules published in early 2025.
These rules will include requirements for retail dispensaries with a special emphasis on three things:

○ Track and trace software
○ Standard operating procedures
○ Security measures

● The OCM expected the initial flood of license lottery applications. Over time as has been the case in other states, they expect the market will right-size itself.

● Authority over the industry in Minnesota is structured this way:

◍ The OCM will award licenses at a state level.

◍ Cities will be responsible for registration at a municipal level, which is required for a business to operate.

◯ Cities have limited latitude in how they might zone or otherwise create rules for the operation of a cannabis business in their city.

○ For example, they can enforce distance requirements from schools, day cares, treatment facilities, etc.
○ Cities will have broader latitude for parking and hours-of-operation restrictions. In general, it will work very similarly to how liquor stores are regulated today.

○ City admin fees for registration of a licensed operation are capped at $500.

◍ Local governments may also limit the number of cannabis retailers as long as there is one active registration for every 12,500 residents.

○ Part of the thinking with regards to this is that the legislature placed a priority on everyone having access to cannabis.
○ This is also intended to suffocate any black market for cannabis in the state.

◍ Many city ordinances will likely be first attempts at responding to the new industry and everyone expects these to be amended over time.

◍ Cities can operate their own municipal cannabis retail stores, though none have yet announced plans to do so.
Operating

● The Minnesota statute is designed to exclude national companies operating in the cannabis industry, which are referred to as MSOs or multi-state operators.

● All the cannabis sold at retailer outlets in Minnesota must be grown in Minnesota. Included in the industry launch will be licenses for cannabis cultivation and manufacturing operations.

● There is no more banking crisis in cannabis from a deposit side. Cannabis businesses now have banks to work with where they can open accounts and deposit money.

● Cannabis businesses face tax challenges. Due to cannabis still being illegal at a federal level, cannabis businesses can’t claim many typical expense deductions and can end up with effective tax rates as high as 84%.

● While corporate lending is maturing, what’s available for cannabis-based businesses in terms of loans are for purchasing real estate, not providing capital for operating expenses.

● Other types of loans typically sought to cover operational expenses such as SBA loans aren’t available to cannabis businesses, due to cannabis still being illegal at a federal level

● Funding for operating expenses is going to largely be found through private investors.

● Because of how cannabis businesses are expected to operate relative to funding sources and tax implications, many of these businesses will have complicated ownership structures.

● Most of these businesses do not work out. The accountants and attorneys on the panel almost unanimously responded that their advice to anyone contacting them for help starting a cannabis business is DONT DO IT.

● If an individual or group does move forward with trying to start a cannabis business, their priority for finding professionals to work with should be something like below.
1. Attorney
2. Banker
3. CPA
4. Insurance Broker
Retail Dispensaries

● In other states, there haven’t been too many construction challenges with retail dispensaries.

● Some challenges do occur in multi-tenant buildings with regards to parking, odor control, and image.

● Anywhere from 2,500 to 5,000 square feet seems to be the sweet spot for size of a retail dispensary.

● A few of the most important questions for dispensary operations when considering spaces are –
○ Where will your trade fixtures go to display the product properly?
○ Where are your locked areas?

● Up to 30-50 parking spots are usually needed for successful high-volume retail.

● An initial capital investment of around $750k is usually needed to fund a build out, purchase inventory, and cover operational losses until the business is profitable.

● A typical build out may cost anywhere from $70 - $100 psf, with a special emphasis on a sales floor that is clean, well-organized and can make the product look appealing.

● Among the extras that will be required to follow state rules are controlled access doors at a cost of about $2,500 each, multiple interior security cameras at a cost of about $1,000 each, and computer networking to archive 24-hour video either onsite or in the cloud for at least 90 days.

● There could be a special emphasis on “border towns” along the state borders with the Dakotas, Iowa, and Wisconsin, none of which have moved forward with legalizing recreational-use cannabis (it is on the ballot this fall in both Dakotas).

Initially explosive retail growth in other states has typically been followed by many dispensary failures and a thinning out of the number of retail operators within a few years, especially where states have set no cap on licenses.
Landlords

● Landlords must be very aware that leasing to cannabis businesses could conflict with existing Landlord loans and insurance coverage.

● Landlord should also contemplate how their standard lease language may need to change if leasing to a cannabis business.
○ LandlordsFor example, a Landlord my want to carefully craft lease language with regards to ever taking over physical possession of a cannabis business’s space, because possession of cannabis by the unlicensed Landlord could be viewed as violating several laws.

Resources

Minnesota's Cannabis Industry Status Update